International Journal of Management Reviews (2010) DOI: 10.1111/j.1468-2370.2009.00275.x The Business Case for Corporate Social Responsibility: A Review of Concepts,

Research and Practiceijmr_275 85..106

Archie B. Carroll and Kareem M. Shabana1 Director, Nonprofit Management & Community Service Program & Robert W. Scherer Professor Emeritus, Department of Management, Terry College of Business, University of Georgia, Athens, GA 30602, USA, and 1Assistant Professor of Management, School of Business, Indiana University Kokomo, 2300 S. Washington Street, Kokomo, IN 46904, USA Email: [email protected]; [email protected]

In this review, the primary subject is the ‘business case’ for corporate social responsi- bility (CSR). The business case refers to the underlying arguments or rationales sup- porting or documenting why the business community should accept and advance the CSR ‘cause’. The business case is concerned with the primary question: What do the business community and organizations get out of CSR? That is, how do they benefit tangibly from engaging in CSR policies, activities and practices? The business case refers to the bottom-line financial and other reasons for businesses pursuing CSR strategies and policies. In developing this business case, the paper first provides some historical background and perspective. In addition, it provides a brief discussion of the evolving understandings of CSR and some of the long-established, traditional argu- ments that have been made both for and against the idea of business assuming any responsibility to society beyond profit-seeking and maximizing its own financial well- being. Finally, the paper addresses the business case in more detail. The goal is to describe and summarize what the business case means and to review some of the concepts, research and practice that have come to characterize this developing idea.

Over the decades, the concept of corporate social Today, one cannot pick up a newspaper, magazine responsibility (CSR) has continued to grow in or journal without encountering some discussion of importance and significance. It has been the subject the issue, some recent or innovative example of what of considerable debate, commentary, theory build- business is thinking or doing about CSR, or some ing and research. In spite of the ongoing delibera- new conference that is being held. Specific journals, tions as to what it means and what it embraces, it news magazines, books, dictionaries, encyclopedias, has developed and evolved in both academic as well websites, discussion lists and blogs treat the concept as practitioner communities worldwide. The idea on a regular basis. The business community has that business enterprises have some responsibilities formed its own organizations specializing in the to society beyond that of making profits for the topic. Business for Social Responsibility (BSR), for shareholders has been around for centuries. For all example, is a business association founded in 1992 to practical purposes, however, it is largely a post- provide corporations with expertise on the subject World War II phenomenon and actually did not and an opportunity for business executives to surge in importance until the 1960s and beyond. advance the field and learn from one another. There Therefore, it is largely a product of the past half has been an explosion of interest in CSR in the Euro- century. pean Union and around the world. The London-based

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Ethical Corporation is another organization that we provide a brief discussion of the evolving under- stages high-profile conferences addressing CSR, standings of CSR and some of the long-established, business ethics and sustainability concerns. Ethical traditional arguments that have been made both for Corporation is an independent media firm, launched and against the idea of business assuming any in 2001, to encourage debate and discussion on responsibility beyond profit-seeking and maximizing responsible business practices. So, while CSR was its own financial well-being. Then we address the once regarded as largely a domestic business issue in business case in more detail. Our goal will be to leading countries of origin, in recent years its popu- describe and summarize what the business case larity has spread onto the world scene, and we now means and to review some of the literature and prac- see CSR initiatives in virtually all the developed tice that has come to characterize this developing nations, and initial thinking and developing taking concept. place in emerging nations as well. The term ‘corporate social responsibility’ is still in popular use, even though competing, complementary Background and historical and overlapping concepts such as corporate citizen- perspectives ship, business ethics, stakeholder management and sustainability are all vying to become the most The roots of CSR certainly extend before World War accepted and widespread descriptor of the field. At II, but we will not go back that far. It should be noted, the same time, the concept of corporate social per- however, that Dean Donald K. David’s comments to formance (CSP) has become an established umbrella the incoming MBA class at the Harvard Business term which embraces both the descriptive and nor- School in 1946 are especially appropriate to recall. mative aspects of the field, as well as placing an Dean David exhorted the future business executives emphasis on all that firms are achieving or accom- to take heed of the responsibilities that had come to plishing in the realm of social responsibility policies, rest on the shoulders of business leaders (Spector practices and results. In the final analysis, however, 2008). In this connection, Bert Spector has argued all these concepts are related, in that they are inte- that the roots of the current social responsibility grated by key, underlying themes such as value, movement can be traced to the period 1945–1960, balance and accountability (Schwartz and Carroll the early years of the Cold War. He has argued that 2008), and CSR remains a dominant, if not exclusive, Dean David and other advocates of expanded notions term in the academic literature and in business prac- of CSR used this as a means of aligning business tice. Just to illustrate how the concept is always interests with the defense of free-market capitalism evolving, CSR International, a non-profit organiza- against what was then perceived to be the danger of tion, announced in 2009 the birth celebration of CSR Soviet Communism (Spector 2008). International, an exciting new organization support- In the 1950s, there was some limited discourse ing the transition from what it called the ‘old CSR’ about CSR. Frank Abrams, a former executive with (Corporate Social Responsibility) or CSR 1.0 to the Standard Oil Company, New Jersey, introduced con- ‘new CSR’ (Corporate Sustainability & Responsibil- cerns about management’s broader responsibilities ity) or CSR 2.0. Whether CSR 2.0 turns out to be in a complex world (Abrams 1951). Abrams argued substantially different remains to be seen. that, as management was professionalizing, compa- In this review commentary, the primary subject is nies had to think not just about profits but also about the ‘business case’ for CSR. In short, this refers to their employees, customers and the public at large. the arguments or rationales supporting or document- And Howard R. Bowen published his seminal book, ing why the business community should accept and Social Responsibilities of the Businessman in 1953 advance the CSR ‘cause’. The business case is con- (Bowen 1953). Bowen’s book was noticeably ahead cerned with the primary question: What do the busi- of its time, by at least a decade, but it came to shape ness community and organizations get out of CSR; significantly future thought on the subject. William that is, how do they benefit tangibly from engaging in C. Frederick, a noted contributor to the CSR litera- CSR policies, activities and practices? For most, the ture, argued that there were three core ideas about business case refers to the bottom-line reasons for CSR that stood out in the 1950s. These included the businesses pursuing CSR strategies and policies. In idea of the manager as public trustee, the balancing developing this business case, we first provide some of competing claims to corporate resources, and historical background and perspective. In addition, corporate philanthropy – business support of good

© 2010 Blackwell Publishing Ltd and British Academy of Management Business Case for Corporate Social Responsibility 87 causes (Frederick 2006). During the 1950s, there was 2008), so only some thematic highlights are touched scant discussion of linking CSR with benefits for upon here. The CSR literature expanded significantly businesses themselves. The primary focus was on during the 1960s, and it tended to focus on the ques- businesses’ responsibilities to society and doing tion of what social responsibility actually meant and good works for society. Theodore Levitt closed out its importance to business and society. Keith Davis the 1950s by warning the business world about the argued that social responsibility referred to ‘busi- dangers of social responsibility (Levitt 1958). In nessmen’s decisions and actions taken for reasons at spite of Levitt’s warnings, CSR would grow in popu- least partially beyond the firm’s direct economic or larity and take shape during the 1960s, driven largely technical interest’ (Davis 1960, p. 70). At the same by the social movements that defined the times, espe- time, William C. Frederick argued that businesses’ cially in the US, and by the forward-thinking aca- resources should also be used for broad social goals demics who were attempting to articulate what CSR (Frederick 1960, p. 60), and Joseph McGuire posited really meant and implied for business. that social responsibility urges corporations to In the US, the most important social movements of assume certain responsibilities to society which the 1960s included civil rights, women’s rights, con- extend beyond their economic and legal obligations sumers’ rights and the environmental movement. (McGuire 1963). A later analysis by Patrick Murphy Key events, people and ideas in these movements argued that the 1960s and early 1970s were the were instrumental in characterizing the social ‘Awareness’ and ‘Issue’ eras of CSR. This was a changes ushered in during the 1960s. In each of these period of changing social consciousness and recog- arenas, business perceived expectations being com- nition of overall responsibility, involvement in municated which eventually had to be addressed. community affairs, concern about urban decay, Thus, the foundation for CSR was being developed correction of racial discrimination, alleviation of pol- by a quickly changing social environment and pres- lution, and the continuing philanthropic era in which sures from others, especially activists, to adopt CSR there was a focus on charitable donations by busi- perspectives, attitudes, practices and policies. In the nesses (Murphy 1978). From about the 1950s 1960s, companies initially did not perceive a ‘social’ forward, Hay and Gray characterized this period of environment in the way that we do today. Yet, piece CSR development as ‘Quality of Life Management’, by piece, the overall social environment was being as contrasted with earlier periods, which emphasized constructed by these movements, and the result profit maximization and trusteeship management would be a dramatically different context, in which (Hay and Gray 1974). Frederick characterized the business would then have to operate. Though the 1960s and 1970s as a stage of ‘corporate social 1960s seemed ripe for advances in social responsi- responsiveness’ (Frederick 2008). Another character- bility thought, the decade was still reeling from Pro- istic of the 1960s was an absence of any coupling of fessor Theodore Levitt’s admonitions about ‘the social responsibility with financial performance (Lee dangers of social responsibility’. Levitt thought that 2008, p. 58). In other words, social responsibility was social concerns and the general welfare were not the driven primarily by external, socially conscious responsibility of business, but of government, and motivations, and businesses were not looking for that business’s job was to ‘take care of the more anything specific in return. material aspects of welfare’. Levitt feared that atten- Formal definitions of CSR began to proliferate in tion to social responsibilities would detract from the the 1970s, and the overall trajectory was towards an profit motive that was so essential for business emphasis on CSP (Carroll 1999; Sethi 1975). The success. But, there were also positive voices advo- 1970s was the decade in which corporate social cating the social responsibility movement. In fact, responsibility, responsiveness and performance significant progress was made by both government became the center of discussions. Ackerman (1973) and academics, and businesses were following in and Murray (1976) argued that what was really parallel. important was not that companies were ‘assuming a As the 1960s transitioned into the 1970s and responsibility’, but that companies were responding beyond, the particular emphasis in the CSR concept to the social environment. Frederick (1978) formal- evolved primarily through the academic contribu- ized this distinction by differentiating corporate tions in the literature and the slowly emerging reali- social responsibility (CSR1) from corporate social ties of business practice. This history and evolution responsiveness (CSR2). CSR1 emphasized compa- has been treated elsewhere (Carroll 1999, 2008; Lee nies ‘assuming’ a socially responsible posture,

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whereas CSR2 focused on the literal act of respond- of sustainability, or sustainable development, and ing or of achieving a responsive posture towards this theme became an integral part of all CSR society. In the mid-1970s, an emphasis on CSP more discussions. clearly emerged. In one respect, CSP was an attempt to reconcile the importance of both CSR1 and CSR2, but it was also about placing an emphasis on achiev- Arguments for and against CSR ing results or emphasizing the outcomes of socially responsible initiatives (Carroll 1979; Wartick and Ever since the debate over CSR began, supporters Cochran 1985; Wood 1991). This focus on outcomes and detractors have been articulating the arguments was moving the field closer to the idea of the ‘busi- for the idea of CSR and the arguments against the ness case’. At least when outcomes are emphasized, concept of CSR. These arguments have been dis- this sets the stage for attempts to measure or gauge cussed extensively elsewhere, but a brief recapitula- the results of CSR policies and practices. tion of them makes sense as we lead up to presenting On the CSR front, the 1980s produced fewer new the ‘business case’. Embedded in the arguments both definitions of the concept, more empirical research, for and against CSR are points which have been and the rise and popularity of alternative themes. made previously, perhaps on a piecemeal basis, sup- These CSR variants included corporate public porting the business case. policy, business ethics and stakeholder theory/ The case against the concept of CSR typically management as well as further developments in CSP begins with the classical economic argument articu- which arrived on the scene in the 1970s (Carroll lated most forcefully by the late Milton Friedman 1999, pp. 285–289). Frederick termed the 1980s as (1962). Friedman held that management has one the beginning of the ‘corporate/business ethics’ responsibility and that is to maximize the profits of stage, wherein the focus became fostering ethical its owners or shareholders. Friedman argued that corporate cultures (Frederick 2008). Research social issues are not the concern of business people seeking to link CSR with corporate financial perfor- and that these problems should be resolved by the mance (CFP) exploded during this decade, and the unfettered workings of the free market system. search for a tighter coupling with firm financial per- Further, this view holds that, if the free market formance became the order of the day (Lee 2008, cannot solve the social problems, it falls not upon p. 58). One could well argue that the search for the business, but upon government and legislation to do business case for CSR began and came-of-age the job. A second objection to CSR has been that during this decade, especially for academic business is not equipped to handle social activities. researchers. This trend continued in the 1990s, and This position holds that managers are oriented the quest for CSR accelerated in terms of its global towards finance and operations and do not have the outreach. The 1990s and 2000s became the era of necessary expertise (social skills), to make socially global corporate citizenship (Frederick 2008). The oriented decisions (Davis 1973). A third objection to early 2000s became preoccupied with the Enron Era CSR is that it dilutes businesses’ primary purpose. of scandals, and these headlined the news until The objection here is that to adopt CSR would put 2008, when the Wall Street Financial Scandals Era business into fields of endeavor that are unrelated to began wreaking havoc all over the globe and will their ‘proper aim’ (Hayek 1969). A fourth argument most likely be with us for some time (Carroll 2009). against CSR is that business already has enough Though CSR continued its quest to find business power, and so why should we place in its hands the legitimacy, the emergence and preoccupation with opportunity to wield additional power, such as social business ethics obscured the continued growth and power (Davis 1973)? A fifth argument is that, by development of the social responsibility theme, pursuing CSR, business will make itself less com- though significant advances were made, especially petitive globally. It should be noted that the argu- in the UK and continental Europe (Moon 2005). The ments presented here were introduced decades ago, quest for the business case for CSR certainly though some still hold them, and that the oppositions became a dominant theme during this period, espe- to the concept of CSR applied when the idea was cially as the business community was seeking to once more narrowly conceived. rationalize and legitimize the activities it had begun Arguments in favor of CSR typically begin with and were continuing. In the early 2000s, the busi- the belief that it is in business’s long-term self- ness community became fascinated with the notion interest – enlightened self-interest – to be socially

© 2010 Blackwell Publishing Ltd and British Academy of Management Business Case for Corporate Social Responsibility 89 responsible. This view holds that, if business is to Google search of CSR definitions, for example, have a healthy climate in which to function in the revealed that the definitions most often found in future, it must take actions now that will ensure its articles and web pages have been set out by organi- long-term viability. A second argument in favor of zations such as BSR, the Commission of the Euro- CSR is that it will ‘ward off government regulation’. pean Communities and CSRwire (Dahlsrud 2006). This is a very practical reason, and it is based on the There are many different ways to think about what idea that future government intervention can be fore- CSR includes and what all it embraces. A recent stalled to the extent that business polices itself with study found that definitions tended to identify self-disciplined standards and fulfills society’s various dimensions that characterized their meaning. expectations of it. Two additional arguments in favor Using content analysis, this study identified five of CSR include ‘business has the resources’ and ‘let dimensions of CSR and used frequency counts via a business try’. These two views maintain that, because Google search to calculate the relative usage of each business has a reservoir of management talent, func- dimension. The study found the following to be the tional expertise and capital, and because so many most frequent dimensions of CSR: stakeholder others have tried and failed to solve social problems, dimension, social dimension, economic dimension, business should be given the chance (Davis 1973, voluntariness dimension and environmental dimen- p. 316). Another justification for CSR holds that pro- sion (Dahlsrud 2006). Though these dimensions acting is better than reacting. This basically means were identified via Google citations, no research that proacting (anticipating, planning and initiating) attesting to their validity has been done. is more practical and less costly than simply reacting Another way to think about CSR is to identify the to social problems once they have surfaced (Carroll different categories of CSR and sort out companies’ and Buchholtz 2009). Finally, it has been argued that activities in terms of these different types, classes or business should engage in CSR because the public kinds of CSR. Using this approach, we decided to strongly supports it. Today, the public believes that, employ Carroll’s four different categories of CSR, in addition to its pursuits of profits, business should which include businesses’ fulfillment of economic, be responsible to their workers, communities and legal, ethical and discretionary/philanthropic respon- other stakeholders, even if making things better for sibilities. This four-part definition of CSR has been them requires companies to sacrifice some profits stated as follows: ‘The social responsibility of busi- (Bernstein 2000). Many of these arguments for and ness encompasses the economic, legal, ethical, and against CSR have been around for decades. They discretionary [later referred to as philanthropic] certainly present the legitimate perspective that there expectations that society has of organizations at a are, indeed, two sides of the argument with respect to given point in time’ (Carroll 1979, p. 500, 1991, almost any concept. p. 283). Because this definition has been used suc- cessfully for research purposes for over 25 years, it was decided this might be a positive and appropriate Defining CSR for business definition to use because of its enduring application case purposes in CSR research. Another reason why this definition is useful is that Over the past half century, many different definitions it specifies the firm’s economic responsibility as a of what CSR really means have been set out. One factor to be considered in CSR, and this becomes recent study identified 37 definitions of CSR (Dahl- very important in thinking about the ‘business case’. srud 2006), and this figure underestimates the true Business people, in particular, like to think of their number, because many academically derived defini- economic/financial/profitability performance as tional constructs were not included owing to the something that they are doing not only for them- methodology for identifying them. Most of the aca- selves, but also for society, as they fulfill their insti- demically derived definitional constructs have been tutions’ mission to provide goods and services discussed elsewhere (Carroll 1999), so we will touch for society. Further, the definition separates out upon only a few of them here to illustrate the evolv- legal, ethical and philanthropic categories of ing nature of CSR’s meaning. What is particularly responsibility/performance, and this provides for a noteworthy of recent accounts of CSR definitions is sharper examination of different corporate actions. how many of them have been introduced by various Further, the four categories of responsibility/ practitioner and quasi-practitioner groups. A recent performance embrace the five dimensions of CSR

© 2010 Blackwell Publishing Ltd and British Academy of Management 90 A.B. Carroll and K.M. Shabana discussed earlier. Whether in the definition’s struc- beyond the economic and legal responsibilities of the ture or its application, business performance with firm, it may be understood that the essence of CSR respect to the environment, stakeholders and society and what it really refers to are the ethical and phil- (social) are captured along with the categories anthropic obligations of the corporation towards of economics and voluntariness (discretionary/ society. Kotler and Lee (2005) essentially see CSR in philanthropic). The four categories of CSR – eco- the same way. They define CSR as ‘a commitment to nomic, legal, ethical and philanthropic – address the improve community well-being through discretion- motivations for initiatives in the category and are ary business practices and contributions of corporate also useful in identifying specific kinds of benefits resources’. that flow back to companies, as well as society, in their fulfillment. Of course, these concepts can be Remarks on the economic and legal responsibilities overlapping and interrelated in their interpretation of business and application, but they are helpful for sorting out the specific types of benefits that businesses receive, Economic responsibilities. The economic responsi- and this is critical in building the ‘business case’. bility of business is ‘to produce goods and services that society desires and to sell them at a profit’ (Carroll 1979, p. 500). By doing so, businesses fulfill The essence of CSR: ethical and their primary responsibility as economic units in philanthropic responsibilities society. The critical question is: To what extent Carroll’s (1979, 1991) four-part definition of CSR should a business pursue profits? Carroll (1991, identifies four categories of responsibilities: eco- p. 41) observes that the profit principle was originally nomic, legal, ethical and discretionary/philanthropic. set in terms of ‘acceptable profits’; however, the prin- These ‘responsibilities’are the expectations placed on ciple transformed to ‘profit maximization’. The doc- the corporation by corporate stakeholders and society trine of profit maximization is endorsed by the as a whole. One of the major advantages of Carroll’s classical economic view led by the late Milton Fried- definition is its expansion of the categories of CSR man (1962) where ‘there is one and only one social that McGuire referred to in 1963. McGuire (1963, responsibility of business – to use it resources and p. 144) argued: ‘The idea of social responsibilities engage in activities designed to increase its profits so supposes that the corporation has not only economic long as it stays within the rules of the game, which is and legal obligations, but also certain responsibilities to say, engages in open and free competition without to society which extend beyond these obligations.’ deception or fraud’. Drucker (1954/2006) presents By identifying and distinguishing the ethical an alternative perspective to the classical economic and discretionary/philanthropic categories, Carroll view. He argues that profit performs three main func- explicitly spelled out what McGuire referred to as the tions. First, it measures the effectiveness of business responsibilities that extend beyond the economic and activities; second, it provides a ‘risk premium’ nec- legal responsibilities. Carroll then made the notion of essary for the corporation to stay in business; and CSR more explicit when he contended that the third, it insures the future supply of capital. ‘A pro- economic and legal responsibilities are ‘required’, fitability objective therefore measures not the the ethical responsibilities are ‘expected’, and maximum profits the business can produce, but the the discretionary/philanthropic responsibilities are minimum it must produce’ (Drucker 1954/2006, ‘desired’. By doing so, he made a distinction between pp. 76–77). the traditional and the new responsibilities of the It is worth noting that Barnett (2007) provides an corporation. The classical responsibilities of the cor- argument which seems to indicate that the principle poration which are embodied in its economic and of maximizing shareholder wealth is, in itself, not in legal responsibilities reflect the old social contract the interest of shareholders. Barnett contends that between business and society. Alternatively, the new excessive financial performance leads to decreasing responsibilities of the corporation which are embod- the ability of the company to influence its stakehold- ied in the ethical and discretionary/philanthropic ers. Barnett (2007, p. 808) explains: responsibilities reflect the new, broader, social con- Doing too well can lead stakeholders to perceive tract between business and society. that a firm is not doing enough good. Excessive Since what is debated in the subject of CSR are the CFP indicates that a firm is extracting more from nature and extent of corporate obligations that extend society than it is returning and can suggest that

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profits have risen because the firm has exploited which contends that firm performance is influenced some of its stakeholders in order to favor sharehold- by the firm’s management of its relationships with its ers and upper management. This can indicate stakeholders, promotes expanding or changing laws untrustworthiness to stakeholders looking to estab- and regulations. The authors assert that stakeholder lish or maintain relations with the firm. theory ‘does not require a change in the law to While tension remains between these two views of remain viable’ (Phillips et al. 2003, p. 491). profit, the notion of an economic responsibility in The two opposing camps continue to present their terms of financial profit to stockholders is accepted arguments to justify the need for the expansion or and required by both views. One may even argue that contraction of the legal requirements imposed on maximizing shareholder wealth in the long run is an business. Advocates of regulation question the ability underlying principle of both views. The real differ- of the free market mechanism to support CSR activi- ence may be that the classical economic view fails to ties (e.g. Valor 2008; Williamson et al. 2006). They appreciate the long-term negative effects of the contend that market failure and the business environ- application of the maximization principle in the short ment are not rewarding firms engaging in CSR term. In contrast, the opposite view applies the maxi- activities. In contrast, opponents of regulation argue mization principle for long-term benefits, which that the free market mechanism promotes the interest entails that such principle may be suppressed in of individuals, and in turn society, by rewarding CSR certain short-term considerations. activities that are actually favored by individuals. Corporate social responsibility activities that are not Legal responsibilities. The legal responsibilities of rewarded by the market are those activities that indi- business refer to the positive and negative obligations viduals do not value and are therefore unwilling to put on businesses by the laws and regulations of the support. The merit of CSR activities, thus, should be society where it operates. Little disagreement exists determined by the free market mechanism. between the various views on CSR regarding what constitutes the legal responsibilities of business. All views accept the requirement of adherence to the The business case for CSR: What does laws and regulations of society. The difference really it really mean? exists regarding the nature and scope of such an obligation. With respect to the nature of the legal Before presenting a review and summary of the obligations, on the one hand, some views contend ‘business case’ for social responsibility, it is impor- that the legal responsibility of business constitutes tant to discuss what this really means. When one the totality of the responsibility of business towards examines the history and evolution of CSR, the idea society. On the other hand, some argue that laws and of a business case for CSR has been developing regulations constitute but one category of the respon- almost since the beginning. Even with early CSR sibility of business towards society. For example, initiatives, there was always the built-in premise that, Carroll (1991, p. 41) considers the laws and regula- by engaging in CSR activities, businesses would be tions as the ‘codified ethics’ of society. They repre- enhancing the societal environment in which they sent ‘partial fulfillment of the social contract existed and that such efforts would be in their long- between business and society’. term enlightened self-interest. Though CSR came With respect to the scope of the legal responsibili- about because of concerns about businesses’ detri- ties, some advocate its expansion to encompass more mental impacts on society (avoiding ‘negatives’), the regulation. They claim that regulation is necessary theme of improving society (creating ‘positives’) was for the fulfillment of CSR. For example, De Schutter certainly in the minds of early theorists and practi- (2008, p. 203) argues that the business case for CSR tioners. With the passage of time and the growth of ‘rests on certain presuppositions about markets and resources being dedicated to social responsibility, it the business environment, which cannot be simply was only natural that questions would begin to be assumed, but should be affirmatively created by a raised about whether CSR was paying its own way, regulatory framework for CSR’. Others oppose such so to speak. Another incentive for the development claims and assert that engagement in CSR activities of the business case was probably a response to and management of stakeholder relations should Milton Friedman’s continuing arguments against the continue to remain voluntary. For example, Phillips concept, claiming that businesses must focus only on et al. (2003) reject the claim that stakeholder theory, long-term profits. If it could be demonstrated that

© 2010 Blackwell Publishing Ltd and British Academy of Management 92 A.B. Carroll and K.M. Shabana

businesses actually benefited financially from CSR, been broken down into four different categories by then possibly Friedman’s arguments would some- Simon Zadek. Zadek has argued that companies what be neutralized. pursue CSR strategies to (1) defend their reputations In essence, then, the quest for the business case for (pain alleviation), (2) justify benefits over costs (the CSR has been developing for several decades. In ‘traditional’ business case), (3) integrate with their recent times, the search for the ‘business case’ for broader strategies (the ‘strategic’ business case), and CSR has accelerated and has come to mean the estab- (4) learn, innovate and manage risk (New Economy lishment of the ‘business’ justification and rationale, Business case) (Zadek 2000). Kurucz et al. (2008, that is, the specific benefits to businesses in an eco- pp. 85–92) also have set out four general types of nomic and financial sense that would flow from CSR business case for CSR which overlap with Zadek’s. activities and initiatives. Questions such as the fol- They maintain that there are four different groupings lowing have framed this search: Can a firm really do of the business case based on the focus of the well by being good? Is there a return on investment to approach, the topics addressed, and the underlying CSR? What are the bottom-line benefits of socially assumptions about how value is created and defined. responsible corporate performance? Is CSP posi- Their four approaches include: (1) cost and risk tively related to CFP? It has been argued that, in reduction; (2) gaining competitive advantage; (3) business practitioner terms, a ‘business case’ is ‘a developing reputation and legitimacy; and (4) pitch for investment in a project or initiative that seeking win–win outcomes through synergistic value promises to yield a suitably significant return to creation. Other widely accepted approaches to the justify the expenditure’. That is, can companies business case include focusing on the empirical perform better financially by addressing both their research linking CSR with CSP and identifying ben- core business operations and their responsibilities to efits to different stakeholder groups that directly or the broader society (Kurucz et al. 2008)? indirectly benefit companies’ bottom lines. In addi- Who really cares whether CSR improves the tion, the socially conscious investment movement, bottom line? Obviously, corporate boards, CEOs, sometimes called ‘ethical investing’ is often built on CFOs and upper echelon business executives care. the belief that there exists a strong correlation They are the guardians of their companies’ financial between social performance and financial perfor- welfare and ultimately must bear responsibility for mance. Others, by contrast, believe socially con- the impact of CSR on the bottom line. At various scious investing is simply the right thing to do. It is levels, they need to justify that CSR is consistent against this backdrop that we review some of the with the firm’s strategies and that it is financially primary arguments that have been developed consti- sustainable (O’Sullivan 2006). But, other groups care tuting the composite business case. as well. Shareholders are increasingly concerned with financial performance and are concerned about possible threats to management’s priorities. Social Documenting the business case activists care because it is in their long-term best for CSR interests if companies can sustain the types of social initiatives which they are advocating. Governmental Attention to the business case for CSR has gained bodies care because they desire to see whether com- noticeable consideration. Lee (2008, p. 53) observes panies can deliver social and environmental benefits a trend in the evolution of CSR theories that reveal ‘a more cost effectively than they can through regula- tighter coupling [between CSR and the] organiza- tory approaches (Zadek 2000). It may also be argued tions’ financial goals’. The focus of CSR theories has that average consumers care as well, as they want to shifted away from an ethics orientation to a perfor- pass on a better world to their children, and many mance orientation. In addition, the level of analysis want their purchasing to reflect their values. has moved away from a macro-social level to an It should also be emphasized that a multitude of organizational level, where the effects of CSR on different business cases for social responsibility have firm financial performance are closely examined. been developing over the years. There is no single Vogel (2005) maintains that the close examination of business case for CSR – no single rationalization for the relationship between CSR initiatives and firm how CSR improves the bottom line. Many different financial performance is a characteristic of the ‘new arguments have been assembled to justify the com- world of CSR’. He argues that ‘old style’ CSR of the posite business case. The business case for CSR has 1960s and 1970s was motivated by social consider-

© 2010 Blackwell Publishing Ltd and British Academy of Management Business Case for Corporate Social Responsibility 93 ations. Economic considerations were not among the The business-case model and the syncretic model motives for CSR: ‘[w]hile there was substantial peer proposed by Berger et al. (2007) may be seen as two pressure among corporations to become more phil- views of the business case for CSR: narrow and anthropic, no one claimed that such firms were likely broad. On the one hand, the business-case model to be more profitable than their less generous com- represents the narrow view of the business case. In petitors’; in contrast, the essence of the ‘new world of this model, the business case is narrow because CSR CSR’ is ‘doing good to do well’ (Vogel 2005, is only recognized when there is a clear link to firm pp. 20–21). financial performance. Often this clear link refers to Vogel observes some features of the ‘new world of direct relationships between CSR initiatives and firm CSR’. He notes that the new world of CSR empha- performance. On the other hand, the view of the sizes the link between CSR and corporate financial business case illustrated by the syncretic model is success. Evidence for such emphasis, Vogel states, broad because it recognizes direct and indirect rela- are the many works (e.g. Jackson 2004; Laszlo 2003; tionships between CSR and firm performance. The Scott and Rothman 1992; Waddock 2002) that advantage of the broad view over the narrow one is promote the ‘responsibility–profitability connection’ that the broad view allows the firm to value and and assert that CSR leads to long-term shareholder appreciate the complex relationship between CSR value. He also reports that ‘[a]ccording to a 2002 and firm performance. Such appreciation may enable survey by PricewaterhouseCoopers, “70 percent of the firm to identify and exploit opportunities that the global chief executives believe that CSR is vital to narrow view would not be able to recognize. their companies’ profitability” ’. This evidence sug- Another advantage of the broad view of the busi- gests that CSR is evolving into a core business func- ness case, which is illustrated by the syncretic model, tion which is central to the firm’s overall strategy and is its recognition of the interdependence between vital to its success. business and society (Berger et al. 2007). The failure to recognize such interdependence in favor of pitting business against society, Porter and Kramer (2006) A broad and a narrow view of the business case argue, leads to reducing the productivity of CSR for CSR initiatives. The authors assert, ‘the prevailing Berger et al. (2007) examine the integration of CSR approaches to CSR are so fragmented and so discon- considerations in the day-to-day business agenda of nected from business and strategy as to obscure organizations. They argue that the ‘mainstreaming’ many of the greatest opportunities for companies to of CSR follows from one of three rationales: the benefit society’ (Porter and Kramer 2006, p. 80). The social values-led model, the business-case model and adoption of CSR practices, their integration with the syncretic stewardship model. In the social values- firm strategy, and their mainstreaming in the day-to- led model, organizations adopt CSR initiatives day business agenda should not be done in a generic regarding specific issues for non-economic reasons. manner. Rather, it should be pursued ‘in the way ‘CSR [is] the organization’s lifeblood and [is] inte- most appropriate to each firm’s strategy’ (Porter and grated into the organizational fiber in every way’ Kramer 2006, p. 78). (Berger et al. 2007, p. 141). By contrast, in both the business-case model and the syncretic stewardship The CSP–CFP relationship model, organizations adopt CSR initiatives for ‘ratio- nal’ reasons. In the business-case model, CSR initia- Perhaps the first attempt to establish the business tives are assessed in a purely economic manner. They case for CSR has been the pursuit of establishing a are only pursued when there is a clear link to firm positive relationship between CSP and CFP.Margolis financial performance. ‘[M]ainstreaming CSR meant and Walsh (2003, p. 268) describe this endeavor as a aggressively pursuing viable business opportunities ‘30-year quest for an empirical relationship between with a CSR dimension’ (Berger et al. 2007, p. 140). a corporation’s social initiatives and its financial In the syncretic stewardship model, the firm is performance’. Griffin and Mahon (1997) present a attuned to ‘the external market for virtue’ while review and an assessment of studies exploring the embracing ‘economic objectives’ (Berger et al. 2007, CSP–CFP relationship. The authors conclude that p. 143). In the syncretic model, CSR is a ‘manage- there is a positive relationship between CSP and CFP. ment philosophy, an overarching approach to busi- They argue that inconsistencies in the results of pre- ness’ (Berger et al. 2007, p. 144). vious empirical studies investigating the CSP–CFP

© 2010 Blackwell Publishing Ltd and British Academy of Management 94 A.B. Carroll and K.M. Shabana relationship may be attributed to methodological dif- CSP–CFP relationship. Future research that accounts ferences. Roman et al. (1999) disagree with Griffin for these factors would indeed improve understand- and Mahon and offer a different conclusion. They ing of the CSP–CFP relationship and would take us a argue that results produced by CSP–CFP studies fall step closer to articulating conclusive findings. into three categories. One category shows a positive link between CSP and CFP,the second shows a nega- Beyond the CSP–CFP relationship: mediating tive link, and the third shows no link. The authors variables and situational contingencies thus conclude that the results are inconclusive. Mahon and Griffin (1999) respond to Roman et al. The broad view of the business case for CSR sug- (1999) by acknowledging that the CSP–CFP rela- gests that the relationship between CSR and firm tionship merits further investigation; however, they financial performance is better depicted when the contend that the findings of Roman et al. (1999) are role of mediating variables and situational contin- influenced by interpretation biases. Mahon and gencies are accounted for. Such a view would allow Griffin assert: for the realization of the full potential of CSR initia- By analyzing the facts gleaned to date, the true tives. An affirmative corporate social agenda may nature of the portrait can be highlighted, and the therefore be created. This affirmative agenda ‘looks framing of the portrait narrowed. However, our beyond community expectations to opportunities to concern is that if we blur the portrait with our pre- achieve social and economic benefits simultaneously. conceived notions of what it should be and how it It moves from mitigating harm to finding ways to should look, and if we inconsistently apply rules to reinforce corporate strategy by advancing social con- include and exclude portions of it, we will be like ditions’ (Porter and Kramer 2006, p. 85). the blind Indian men and we will miss many over- Pivato et al. (2008) drew attention to the arching themes inherent in this elephant. (Mahon importance of the role of mediating variables in and Griffin 1999, p. 131) the responsibility–performance relationship. The Margolis and Walsh seem to provide support for authors argued that attention must be given to ‘inter- the Griffin and Mahon (1997) and Mahon and Griffin mediate performance measures, such as customer (1999) positions. They present a review and assess- satisfaction,...toprove positive correlations with ment of 127 empirical studies exploring the CSP– social investment’ (Pivato et al. 2008, p. 3). In addi- CFP relationship, in which they conclude that a tion, the authors contend that examining specific ‘simple compilation of the findings suggests there drivers of social performance rather than its indica- is a positive association, and certainly very little tors would be more beneficial. Pivato et al. (2008) evidence of a negative association, between a support their claim by an empirical study which illus- company’s social performance and its financial trates that social performance positively influenced performance’ (Margolis and Walsh 2003, p. 277). In brand loyalty through building trust with consumers. addition, the meta-analysis by Orlitzy et al. (2003) The study indicates that CSR initiatives may have an supports a positive relationship between CSR and indirect positive influence on firm financial perfor- CFP. Finally, it should be indicated that a recent mance. Accordingly, appreciation of the complexity (2008) major survey from the Economic Intelligence of the relationship between CSR and firm financial Unit (EIU) suggests that the vast majority of US performance would be much more beneficial than a business leaders now accept that there is a clear cor- simplistic view that only recognizes the clear and relation between CSR performance and financial per- direct responsibility–performance relationship. formance. The study showed that the managerial Barnett (2007) argues that the impact of CSR on support for CSR initiatives extends to the corporate CSP varies from one firm to the other. He explains board level as well (BusinessGreen 2008). that such variation, which is reflected by the incon- On the whole, CSP–CFP research seems to indi- clusive results from CSP–CFP research, may be cate the existence of a positive relationship between attributed to factors specific to each situation. In CSP and CFP; however, some inconsistencies linger. other words, situational contingencies affect the rela- In light of the broad view of the business case for tionship between CSR and firm financial perfor- CSR these inconsistencies may be attributed not only mance. Accordingly, CSR may have a positive effect to methodological differences and interpretation on firm financial performance in certain situations, biases, but also to the existence of mediating vari- while having negative or no effect in other situations. ables and situational contingencies that influence the One of the factors that determines whether CSR has

© 2010 Blackwell Publishing Ltd and British Academy of Management Business Case for Corporate Social Responsibility 95 a positive, negative or neutral effect on firm financial thropic responsibilities, which we argued constitutes performance is stakeholder influence capacity (SIC), the essence of CSR. Discussion of the benefits which refers to ‘the ability of a firm to identify, act flowing from each category of responsibility is orga- on, and profit from opportunities to improve stake- nized according to the framework put forward by holder relationships through CSR’ (Barnett 2007, Kurucz et al. (2008, pp. 85–92), which identifies four p. 803). The aggregate benefits accruing from a categories of benefits that firms may attain from firm’s past interactions with its various stakeholders engaging in CSR activities: (1) cost and risk reduc- form an intangible asset, which may be referred to as tion; (2) gaining competitive advantage; (3) develop- a firm’s SIC stock. A firm’s SIC stock influences the ing reputation and legitimacy; and (4) seeking extent to which the firm is able to impact its stake- win–win outcomes through synergistic value cre- holders through future CSR practices. Higher levels ation. Finally, we discuss some of the criticisms and of SIC stock would allow a firm to garner support limitations of the current arguments of the business from its stakeholders regarding certain CSR prac- case for CSR. tices. Conversely, lower levels of SIC stock would It may be worth reiterating at this point what limit a firm’s ability to cultivate stakeholder support aspect of CSR is especially relevant in the current with respect to certain CSR practices. SIC stock, discussion. As stated previously, essentially, CSR then, moderates the relationship between CSR and refers to the obligations of the corporation towards stakeholder relations (Barnett 2007). society which extend beyond its economic and legal The identification of the role of mediating vari- obligations. These obligations are identified as the ables and situational contingencies improves the ethical and discretionary/philanthropic responsibili- understanding of the responsibility–performance ties. We hold that these two categories of responsi- relationship. Firms are therefore able to identify and bilities capture and embrace the essence of the pursue profitable CSR initiatives and establish a rein- concept of CSR, especially for building the business forcing relationship between corporate strategy and case. For, without a doubt, few business people the advancement of social conditions as suggested would question the economic and legal responsibili- by Porter and Kramer (2006). Consequently, the ties as being necessary for survival and growth. business case for CSR is made clearer and more compelling. The prevalence of CSR practices with business-case effects Evidence of the business case for CSR Ethical responsibilities in practice. The ethical responsibilities of business ‘embody those standards, As stated previously, the business case for CSR norms, or expectations that reflect a concern for what refers to the ‘business’ justification and rationale; consumers, employees, shareholders, and the com- that is, the specific benefits to businesses in an eco- munity regard as fair, just, or in keeping with the nomic and financial (‘bottom-line’) sense that would respect or protection of stakeholders’ moral rights’ flow from CSR activities and initiatives. In some (Carroll 1991, p. 41). In essence, ethical responsibili- cases, the effect of CSR activities on firm financial ties refer to a corporation’s voluntary actions to performance may be seen clearly and directly. In promote and pursue social goals that extend beyond other cases, however, the effect of CSR activity on their legal responsibilities. These goals are of impor- firm performance may only be seen through the tance to society or to different stakeholders in understanding of mediating variables and situational society, but their promotion and pursuit are beyond circumstances. the corporation’s immediate financial interest. The In this section, we present evidence of the effect of importance of these social goals to society may be CSR on firm performance in support of the business inferred from the presence of an interest to identify case. The evidence primarily illustrates the effect of them and measure and report corporate performance CSR on firm performance through mediating vari- regarding them. ables and situational circumstances. First, the discus- Perhaps the most widely known and accepted sion highlights the prevalence of CSR activities and measure of corporate performance regarding social the range of their adoption by business. Second, the goals is the Kinder, Lydenberg, Domini (KLD) social discussion reviews the benefits of CSR that flow performance index. The KLD index covers corporate from firms’ fulfillment of their ethical and philan- performance regarding environmental, social and

© 2010 Blackwell Publishing Ltd and British Academy of Management 96 A.B. Carroll and K.M. Shabana

governance issues. In addition, the index includes (Starbucks 2009). Starbucks’ participation in Fair- measures for controversial business issues. Environ- trade dates back to April, 2000 when it first ‘signed a mental issues include climate change, products and contract with TransFair USA to sell Fairtrade certi- services, and operations and management; social fied coffee in more than 2000 stores, beginning issues include community, diversity, employee rela- ...fall [2000]’ (Cray 2000, p. 4). Starbuck’s tions, human rights and product; governance issues program, similar to Antalis’ green philosophy, is vol- include reporting and structure; and, finally, con- untary and aims to fulfil an ethical responsibility of troversial business issues include abortion, adult business. entertainment, alcohol, contraceptives, firearms, gambling, military, nuclear power and tobacco (KLD Philanthropic responsibilities in practice. The Research and Analytics, Inc. 2009). The Global discretionary/philanthropic responsibilities of busi- Reporting Initiative (GRI) provides an alternative ness encompass ‘those corporate actions that are in framework to assess CSP. In addition to economic response to society’s expectation that business be a and environmental indicators, its Sustainability good corporate citizen. This includes actively engag- Reporting Guidelines (Global Reporting Initiative ing in acts or programs to promote human welfare or 2006) identify four categories of social performance good will’ (Carroll 1991, p. 42). Many businesses indicators: labor practices and decent work, human make donations directed at various causes such as rights, society and product responsibility. Both the education, community improvement, and arts and KLD index and the GRI sustainability reporting culture (Seifert et al. 2004). The Committee Encour- guidelines indicate the presence of societal and aging Corporate Philanthropy (CECP) reports that, stakeholder concerns regarding corporate perfor- according to a 2007 survey, the median total giving mance pertaining to social goals. of Fortune 100 companies was $46.31 million, with In response to the mounting social and stakeholder 71% of Fortune 100 companies giving more than concerns, many corporations are adopting initiatives they did in 2006 (CECP 2009a). Bruch and Walter and programs directed at the ethical responsibilities (2005, p. 49) observe that ‘[i]n the United Kingdom of business. For example, the British paper manufac- alone, leading publicly traded companies made dona- turer Antalis seeks to reduce the negative impact of tions to non-profit organizations in 2003 and 2004 its operations on the natural environment by adopting that were valued at more than $1.6 billion and that a ‘green’ philosophy. Antalis became ‘the first UK equaled close to 1% of the companies’ pre-tax paper merchant to be certified under both the Forest profits’. Corporate philanthropy is not a new phe- Stewardship Council (FSC) and Programme for the nomenon. Seifert et al. (2003, p. 195) report that Endorsement of Forest Certification (PEFC)’ (Print- ‘corporate philanthropy as a percentage of profits ing World 2005, p. 41). In addition, Antalis supports averaged 1.3% in 1999’. Among the donors were suppliers whose operations meet or exceed the Merck, which donated ‘over $40 million in cash and environmental standards set by international organ- over $100 million in medicines....’Other donors izations which aim to improve environmental included Wal-Mart, Kroger, Philip Morris and performance of business, such as the International Procter & Gamble. Corporate philanthropy is also Standards Organization and the Eco-management global in scope. Many corporations engage in phil- and Audit Scheme (Printing World 2005). The green anthropic activities directed at foreign recipients. A philosophy adopted by the company is not mandated number of Fortune 500 companies made donations by law. Rather, it is a voluntary initiative which aims for disaster relief in the US, Kashmir and South Asia to fulfill an ethical responsibility of business. (Muller and Whiteman 2009). Another example of a program directed at fulfill- To appreciate the importance of the corporate phi- ing the ethical responsibility of business is Star- lanthropy movement, one needs to acknowledge its bucks’ participation in the Fairtrade coffee market. scope. Corporate philanthropy is not just limited to Coffee is labeled Fairtrade when certified by Trans- monetary donations made by corporations. Many Fair USA, which is the US branch of Fair Trade corporations encourage philanthropic activities by Labeling Organizations (FLO). ‘Under FLO’s poli- their employees and customers through various cies, farmers are provided credit and assured a forms of collaboration. Microsoft, Ashland Oil and minimum of $1.26 per pound’ (Cray 2000, p. 4). JPMorgan Chase are among the members of the Starbucks announced that it will ‘double its purchase ‘Workplace Giving’ campaign, which is ‘an [of Fairtrade coffee] to 40 million pounds in 2009’ employer-sponsored program that offers employees

© 2010 Blackwell Publishing Ltd and British Academy of Management Business Case for Corporate Social Responsibility 97 the opportunity to make a charitable contribution threats through a threshold level of social or environ- through payroll deduction’ (Global Impact 2009a). mental performance’ (Kurucz et al. 2008, p. 88). The program is coordinated by Global Impact, which T. Smith (2005) argues that CSR activities in the ‘is a not-for-profit organization dedicated to helping form of equal employment opportunity (EEO) poli- the world’s most vulnerable people’ (Global Impact cies and practices and environmentally responsible 2009b). General Mills Inc. partnered with its custom- commitments enhance long-term shareholder value ers to raise donations for the Susan G. Komen Breast by reducing costs and risks. He contends that explicit Cancer Foundation. The company donated 10 cents EEO statements are necessary to illustrate an inclu- on behalf of its customers for each pink-top Yoplait sive policy which reduces employee turnover through yogurt sold (Byrnes 2005). Through a different form improving morale. Smith’s argument is consistent of collaboration with its customers, Wal-Mart stores, with the contentions of others (e.g. Berman et al. in certain locations, collected donations for Iowa 1999; Robinson and Dechant 1997; Thomas and Ely flood victims of June 2008. Donations were collected 1996) that ‘[l]ack of diversity may cause higher turn- in the form of supplies and money. ‘The money [was] over and absenteeism from disgruntled employees’ used to purchase large quantities of items to send’ (Berman et al. 1999, p. 490). (News Channel 11 2008). Cost and risk reduction may also be achieved In addition to the broad scope of philanthropic through CSR activities directed at the natural envi- activity, it has been gaining more attention from cor- ronment. A number of researchers (e.g. Berman et al. porate executives. The CECP reports that the mem- 1999; Dechant et al. 1994; Hart 1995; Shrivastava berships of global CEOs and their attendance of the 1995) contend that being environmentally proactive annual CEO meetings attest to their support of the results in cost and risk reduction. Berman et al. mission of the CECP: ‘to lead the business commu- (1999, p. 489) recap: ‘being proactive on environ- nity in raising the level and quality of corporate mental issues can lower the costs of complying with philanthropy’ (CECP 2009b). This broad scope and present and future environmental regulations... attention being received from top executives indicate [and]...enhance firm efficiencies and drive down the extent of the business interest in corporate phi- operating costs’. Environmentally responsible lanthropy. This interest earned corporate philan- commitments may also reduce the negative impact of thropy a spot on the agenda of CEOs and produced a social concern. For example, ‘[t]hree separate law- significant social pressure that mandated a response suits filed in 1999 against 27 well known retailers on from corporations. behalf of Saipan garment workers demonstrate the business risk associated with inadequate vendor stan- dards’ (T. Smith 2005, p. 60). Business-case arguments for CSR practices Corporate social responsibility activities directed This section presents business-case arguments for at managing community relations may also result in CSR practices. The arguments are organized in four cost and risk reductions (Berman et al. 1999). Build- sections corresponding to the four CSR arguments ing positive community relationships may contribute proposed by Kurucz et al. (2008). The first section to the firm’s attaining tax advantages. In addition, covers CSR benefits in terms of cost and risk reduc- positive community relationships decrease the tion. The second section demonstrates the effects of amount of regulation imposed on the firm, because CSR on competitive advantage. The third section the firm is perceived as a sanctioned member of discusses the effects of CSR on company legitimacy society. Cost and risk reduction arguments for CSR and reputation. Finally, the fourth section illustrates have been gaining wide acceptance among managers the role of CSR in creating win–win situations for the and executives. In a survey of business executives by company and society. PricewaterhouseCoopers cited in Fortune (2003), 73% of respondents indicated that ‘cost savings’ Cost and risk reduction. Cost and risk reduction were one of the top three reasons why companies are justifications constitute arguments that contend that becoming more socially responsible. Cost savings engaging in certain CSR activities will reduce costs obviously attract top management attention as a spe- and risks to the firm. ‘[T]he primary view is that the cific bottom-line benefit to CSR. demands of stakeholders present potential threats to the viability of the organization, and that corporate Gaining competitive advantage. The term ‘com- economic interests are served by mitigating the petitive advantage’ in this section is best understood

© 2010 Blackwell Publishing Ltd and British Academy of Management 98 A.B. Carroll and K.M. Shabana

in the context of a differentiation strategy. In other substantiated ‘if it increases shareholder returns’ words, this section focuses on how firms may use (Buchholtz et al. 1999, p. 169). Porter and Kramer CSR practices to set themselves apart from their (2002, p. 59) provide a premise for such an argu- competitors. The previous section, which focuses on ment. The authors maintain that a business may gain cost and risk reduction, illustrates how CSR practices competitive advantages through its philanthropic may be used to build a competitive advantage activities when such activities are directed at causes through a cost leadership strategy. where there is a ‘convergence of interests’ between Competitive advantage justifications contend that, the economic gains and the social benefits. by engaging in certain CSR activities firms may Bruch and Walter (2005) argue that companies use improve their competitiveness. Stakeholder demands philanthropy to enhance their competitive advantage are seen as opportunities rather than constraints. through combinations of market (external) and com- Firms strategically manage their resources to meet petence (internal) orientations. Through a market these demands and exploit the opportunities associ- orientation, companies design their philanthropic ated with them for the benefit of the firm (Kurucz activities to fit external demands and meet the expec- et al. 2008). ‘Competitive advantages’ was cited as tations of key stakeholders. The companies therefore one of the top two justifications for CSR in a survey improve their competitive advantage through of business executives reported in Fortune (2003). ‘improved marketing and selling capabilities, higher N. Smith argues that companies may build their attractiveness as an employer or better relationships competitive advantage through CSR strategies. He with governmental and nongovernmental organiza- explains: ‘a firm’s social responsibility strategy, if tions’ (Bruch and Walter 2005, p. 50). Deutsche genuinely and carefully conceived, should be Lufthansa AG, for example, enhances its relationship unique...’N.Smith(2003, p. 67). This uniqueness with communities within which it operates by oper- may serve as a basis for setting the firm apart from its ating a community-involvement program (Bruch and competitors and, accordingly, its competitive advan- Walter 2005, p. 50). McDonald’s Corporation tage. For example, T. Smith (2005) maintains that an supports Ronald McDonald House Charities explicit statement of EEO policies would have addi- (McDonald’s 2009) as its largest corporate donor tional benefits to the cost and risk reduction, dis- (Ronald McDonald House Charities 2009). cussed above. Such policies would provide the firm Through a competence orientation, companies with a competitive advantage because ‘[c]ompanies may align their philanthropic activities with their without inclusive policies may be at a competitive capabilities and core competencies. ‘In so doing, disadvantage in recruiting and retaining employees they avoid distractions from the core business, from the widest talent pool’ (p. 60). enhance the efficiency of their charitable activities Corporate social responsibility initiatives can also and assure unique value creation for the beneficia- contribute to strengthening a firm’s competitive ries’ (Bruch and Walter 2005, p. 50). ‘For instance, advantage through enhancing its relationships with its McKinsey & Co. offers free consulting services to customers. For example, Pivato et al. (2008) demon- non-profit organizations in social, cultural and edu- strates that CSR initiatives enhance brand loyalty. In cational fields. Beneficiaries include public art gal- another study, Bhattacharya and Sen (2004, p. 10) leries, colleges and charitable institutions’ (Bruch observe that a ‘positive link of CSR to consumer and Walter 2005, p. 50). Home Depot Inc. has been patronage is spurring companies to devote greater providing rebuilding know-how to the communities energies and resources to CSR initiatives’. Corporate victimized by Hurricane Katrina (Home Depot social responsibility initiatives were also found to 2009). Strategic philanthropy, defined as ‘the process have a positive impact on attracting investment. T. by which contributions are targeted to serve direct Smith (2005, p. 64) reports that many institutional business interests while also servicing beneficiary investors ‘avoid companies or industries that violate organizations’ (Tokarski 1999, p. 34), helps compa- their organizational mission, values, or principles. nies to gain a competitive advantage and, in turn, ...[Theyalso] seek companies with good records on boosts its bottom line (Seifert et al. 2003). Corporate employee relations, environmental stewardship, com- philanthropy, in this case, is used as a means of munity involvement, and corporate governance....’ advancing corporate interests. The business case for corporate philanthropy may Corporate social responsibility initiatives enhance be made when it is justified based on an economic a firm’s competitive advantage to the extent that they rationale. In other words, corporate philanthropy is influence the decisions of the firm’s stakeholders in

© 2010 Blackwell Publishing Ltd and British Academy of Management Business Case for Corporate Social Responsibility 99 its favor. Firms build a competitive advantage by egy include creating purchasing incentives and engaging in those CSR initiatives that meet ‘the per- enhancing company and product images. Through ceived demands of stakeholders’ (Kurucz et al. 2008, cause marketing, companies are able to illustrate that p. 89). In other words, one or multiple stakeholders they can, mutually, pursue their profitability goals will prefer the firm over its competitors specifically and meet the needs of the different stakeholders in because of the firm’s engagement in such CSR society. Therefore they are able to demonstrate that initiatives. they ‘belong’ to society. For example, General Mills Inc., through its subsidiary Yoplait USA Inc., Developing reputation and legitimacy. Reputation donated $1.5 million to the breast cancer cause and legitimacy arguments maintain that firms may through its Breast Cancer Initiative (Yoplait 2009a). strengthen their legitimacy and enhance their reputa- The company donated 10 cents for every ‘pink lid’ tion by engaging in CSR activities. Suchman (1995, that a consumer sent to the company as proof of p. 574) defines legitimacy as ‘a generalized percep- purchase of the Yoplait yogurt (Yoplait 2009b). tion or assumption that the actions of an entity are Another example of cause marketing is the buy desirable, proper, or appropriate within some socially (RED) initiative. ‘(RED) is a simple idea that trans- constructed system of norms, values, beliefs, and forms [the] incredible collective power [of] consum- definitions’. Fombrun and Shanley (1990) explain ers into a financial force to help others in need’ (RED that perceptions of a firm’s concern for society illus- 2009). Companies participating in the (RED) initia- trates that the firm is able to build ‘mutualistic’ rela- tive donate 50% of their profits from the product to tionships, which indicate that the firm is able to purchase and distribute antiretroviral medicine to operate while adhering to social norms and meeting battle AIDS in Africa (RED 2009). Both examples expectations of different stakeholder groups. Firms presented above, illustrate how firms are able to ‘focus on value creation by leveraging gains in underscore that their pursuit of financial gains is not reputation and legitimacy made through aligning inconsistent with the pursuit of social goals. Rather, stakeholder interests’ (Kurucz et al. 2008, p. 90). the firms are able to illustrate that both goals may be Reputation and legitimacy sanction the firm to pursued simultaneously. Accordingly, the firms operate in society. succeed in establishing that their pursuit of financial N. Smith contends that CSR activities enhance the gains is a legitimate pursuit and is not carried out at ability of a firm to attract consumers, investors and the expense of social welfare. employees. He states that ‘consumers report that Corporate philanthropy is another CSR activity many claim to be influenced in their purchasing deci- which aims to enhance corporate legitimacy and sions by the CSR reputation of firms’ (N. Smith reputation. Chen et al. (2008, p. 131) posit that ‘cor- 2003, pp. 61–63). He also reports that ‘[a]ccording to porate philanthropy may...beatool of legitimiza- the Social Investment Forum, $2.32 trillion or nearly tion....’Theauthors argue that some firms that have one out of every eight dollars under professional negative social performance in the areas of environ- management in the United States was involved in mental issues and product safety use charitable con- socially responsible investing in 2001’ (p. 63). tributions as a means for building their legitimacy. Finally, N. Smith claims that ‘some employees Firms may also use philanthropy to strengthen their express a preference for working for more socially legitimacy through managing their local dependency responsible companies’ (p. 63). T. Smith presents and creating trust (Kamens 1985). another example of CSR activities that promote an Corporations are also reasoned to enhance their organization’s legitimacy and reputation. T. Smith legitimacy and reputation through disclosure of argues that ‘strong vendor standards and independent information regarding their performance on different monitoring’ helps build ‘a company’s reputation and social and environmental issues (Brammer and the value of its brand, which are among its most Pavelin 2004). One such disclosure practice is cor- valuable assets’ (T. Smith 2005, p. 60). porate social reporting. Corporate social reporting An example of a CSR activity which is directed at refers to the issue of standalone reports that provide developing reputation and legitimacy is cause mar- information regarding a company’s economic, envi- keting. Cause marketing is a strategy where, in addi- ronmental and social performance. The practice of tion to emphasizing product advantages, product corporate social reporting has been encouraged by benefits are linked to appeals for charitable giving the establishment of the GRI in 1997 and the launch (Smith and Alcron 1991). The benefits of this strat- of the Global Compact in 1999 (Antal et al. 2002).

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Through the issue of a social report, firms are able to occurred in European consumer markets as a result illustrate that their operations are consistent with of perceived imposition of unlabelled, genetically social norms and expectations, therefore they are modified food, ingredients’ (Wheeler et al. 2003, legitimate. p. 7). The win–win perspective to CSR practices is Seeking win–win outcomes through synergistic value aimed at satisfying stakeholders’ demands while, at creation. Synergistic value creation arguments the same time, allowing the firm to pursue its opera- focus on exploiting opportunities that reconcile the tions. By engaging its stakeholders and satisfying differing stakeholder demands. Firms do this by their demands, the firm finds opportunities and solu- ‘connecting stakeholder interests, and creating plu- tions which enable it to pursue its profitability inter- ralistic definitions of value for multiple stakeholders est with the consent and support of its stakeholder simultaneously’ (Kurucz et al. 2008, p. 91). environment. The win–win perspective to CSR prac- Porter and Kramer (2002, p. 66) argue that, when tices provides a view in which CSR is perceived as a companies ‘get the where and how right’, philan- vehicle that allows both the firm to pursue its interest thropic activities and competitive advantage become and stakeholders to satisfy their demands. mutually reinforcing and create a virtuous circle. They contend that corporate philanthropy may be Limitations of business-case arguments for used to influence the competitive context of an orga- CSR practices nization, which would allow the organization to improve its competitiveness and at the same time While acceptance of the arguments for the business fulfill the needs of some of its stakeholders. For case for CSR has been growing, it is worth noting example, charitable giving to education causes would some of its criticisms and limitations. Valor (2008) improve the quality of human resources available for argues that consumers may not have the ability to the firm. Similarly, charitable contributions to com- support companies engaging in CSR activities, munity cause would result in the creation and pres- owing to their limited power in the marketplace. ervation of high local quality of life, which may Accordingly, CSR initiatives are not rewarded, and sustain ‘sophisticated and demanding local custom- the business case for CSR does not hold. To support ers’ (Porter and Kramer 2002, p. 60). CSR initiatives and make the business case for CSR, The notion of creating win–win outcomes through Valor proposes that policy-makers empower consum- CSR activities has been raised before. Drucker ers by providing consumers with more information (1984, p. 62) argues ‘the proper “social responsibil- through mandatory reporting on social and environ- ity” of business is to...turnasocial problem into mental performance and the development of a ‘com- economic opportunity and economic benefit, into prehensive social or CSR’ label (Valor 2008, p. 323). productive capacity, into human competence, into Another limitation of the business case for CSR is well-paid jobs, and into wealth’. Wheeler et al. the implied assumption that the positive correlation (2003) echo Drucker’s contention. They posit ‘it will between carefully chosen CSR initiatives and firm not be too long before we can begin to assert that the financial performance is perpetual. This implied business of business is the creation of sustainable assumption may not be accurate. Mintzberg (1983) value – economic, social and ecological’ (Wheeler argues that firms may be rewarded, in an economic et al. 2003, p. 20). and financial sense, for engaging in CSR practices to For example, Wheeler et al. contend that the win– a certain extent. Beyond a given level of CSR invest- win perspective adopted by the life sciences firm ment, the market will cease to reward it. Mintzberg Novo Group allowed it to pursue its business asserts ‘[t]he stock market is willing to reward social ‘[which] is deeply involved in genetic modification responsibility only to a point. It pays to be good but and yet maintains highly interactive and constructive not too good’ (Mintzberg 1983, p. 10). relationships with stakeholders and publishes a Williamson et al. (2006) found that CSR activities highly rated environmental and social report each are driven mainly by regulatory structures and the year’ (Wheeler et al. 2003, p. 8). In contrast, Mon- pursuit of direct cost reductions in small and santo faced several difficulties in its business, which medium-sized manufacturing firms. The authors is of a similar nature to that of Novo Group, due to its conclude that the environment in which those firms neglect of stakeholder demands. Monsanto’s diffi- operate fails to recognize the benefits of the broader culties materialized in ‘a major backlash (that) business case. In that environment, CSR practices are

© 2010 Blackwell Publishing Ltd and British Academy of Management Business Case for Corporate Social Responsibility 101 motivated by regulatory compliance and direct firm financial performance while accounting for the causal relationships between CSR and firm financial effects of mediating variables and situational contin- performance. Similarly to Valor, Williamson et al. gencies. The inconsistencies in the results of the appeal for regulation. They assert: ‘that regulation responsibility–performance studies may therefore be has a vital part to play in improving the environmen- justified. The benefits of CSR are not homogeneous, tal and social practices of [small and medium sized and effective CSR initiatives are not generic. Effec- manufacturing enterprises]’ (Williamson et al. 2006, tive CSR rests on developing the appropriate CSR p. 326). De Schutter (2008) has also highlighted the strategy (N. Smith 2003; T. Smith, 2005) where CSR negative effect of what he called ‘market failures’ activities are those directed at improving stakeholder and urged for more regulation to support CSR relations and, at the same time, improving social practices. welfare (Barnett 2007). The right CSR strategy is the The criticisms directed at the arguments of the one that pursues issues which demonstrate a conver- business case for CSR underscore the impact of the gence between economic and social goals (Porter and market and regulation on CSR practices. As the busi- Kramer 2006). ness case is premised on the notion that the market To formulate a successful CSR strategy, firms will reward CSR practices, situations where the must understand that the benefits of CSR are depen- market does not support CSR practices strike at the dent on mediating variables and situational contin- foundation of the business case. Establishing an gencies. Pivato et al. (2008) illustrate the role of trust affirmative answer to the question ‘Is there a market as a mediating variable which shapes the relationship for virtue?’ (Vogel 2005, p. 19) is therefore essential between CSR activities and firm performance. for making the business case for CSR. Barnett (2007) set out the construct of stakeholder influence capacity, which illustrates how situational contingencies may affect the impact of CSR activi- Summary and conclusions ties on firm financial performance. It is critical to apply the contingency perspective as suggested by The business case for CSR refers to the arguments Barnett (2007) and account for the role of mediating that provide rational justification for CSR initiatives variables as proposed by Pivato et al. (2008) in the from a primarily corporate economic/financial per- exploration of the relationship between CSR and firm spective. Business-case arguments contend that firms financial performance. A contingency perspective which engage in CSR activities will be rewarded by would allow the development of justifications for the the market in economic and financial terms. A lack of a positive relationship between CSR and firm narrow view of the business case justifies CSR ini- financial performance in certain circumstances. In tiatives when they produce direct and clear links to addition it would provide a defense for the business firm financial performance. Mostly, the narrow view case for CSR in environments where the business of the business case focuses on immediate cost case is argued to have failed (e.g. De Schutter 2008; savings. By contrast, the broad view of the business Valor 2008; Williamson et al. 2006). case justifies CSR initiatives when they produce The rationale for the business case for CSR may direct and indirect links to firm performance. The be categorized under four arguments: (1) reducing advantage of the broad view over the narrow view is cost and risk; (2) strengthening legitimacy and repu- that it allows the firm to benefit from CSR opportu- tation; (3) building competitive advantage; and (4) nities. The broad view of the business case for CSR creating win–win situations through synergistic enables the firm to enhance its competitive advantage value creation (Kurucz et al. 2008). Cost and risk and create win–win relationships with its stakehold- reduction arguments posit that CSR may allow a firm ers, in addition to realizing gains from cost and risk to realize tax benefits or avoid strict regulation, reduction and legitimacy and reputation benefits, which would lower its cost. The firm may also lower which are realized through the narrow view. the risk of opposition by its stakeholders through The broad view enhances the acceptance of the CSR activities. Legitimacy and reputation arguments business case for CSR, because it acknowledges the hold that CSR activities may help a firm strengthen complex and interrelated nature of the relationship its legitimacy and reputation by demonstrating that it between CSR and firm financial performance. Rec- can meet the competing needs of its stakeholders and ognizing this complexity translates into a clearer at the same time operate profitably. A firm therefore understanding of the impact of CSR initiatives on would be perceived as a member of its community,

© 2010 Blackwell Publishing Ltd and British Academy of Management 102 A.B. Carroll and K.M. Shabana and its operations would be sanctioned. Competitive tionship between stakeholder management models and advantage arguments contend that, by adopting firm financial performance. Academy of Management certain CSR activities, a firm may be able to build Journal, 42, pp. 486–506. strong relationships with its stakeholders and garner Bernstein, A. (2000). Too much corporate power. Business their support in the form of lower levels of employee Week, 11 September, p. 149. Bhattacharya, C.B. and Sen, S. (2004). Doing better at doing turnover, access to a higher talent pool, and customer good: when. why, and how consumers respond to corpo- loyalty. Accordingly, the firm will be able to differ- rate social initiatives. California Management Review, 47, entiate itself from its competitors. Synergistic value pp. 9–24. creation arguments hold that CSR activities may Bowen, H. (1953). 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